Competition & The Role of External Agents: The 2009 Delinquency Crisis in Southern Karnataka

This paper examines the delinquency crisis that affected microfinance in the southern districts of Karnataka, India in 2009.

Microfinance in Karnataka has grown at a rapid pace. Multiple borrowing and lack of assessment of repayment capacity led to mass delinquency in Kolar, the epicentre of the crisis. The management of the crisis in the initial stages reflected the inexperience of MFIs in the region with this type of problem. The paper draws the following lessons from the crisis:

• MFIs should share information on multiple borrowing, preferably through a credit bureau;
• Larger MFIs should develop capabilities to undertake individual lending , so that clients with larger needs are not compelled to become members of several MFIs;
• Clients with higher levels of borrowing should be assessed for that level of borrowing and not for smaller amounts per MFI;
• MFIs need a more flexible approach to delinquency so that staff are encouraged to report cases of genuine economic difficulty;
• MFI managements should be more responsive and flexible in situations of economic crisis;
• Loan rescheduling should not be treated as a forbidden instrument in any and all situations.